SA’s insurers are having to break away from ‘business as usual’ to look for new ways to achieve growth

Despite a challenging operating and economic landscape, South Africa’s major insurers produced a positive set of results for the year ended 31 December 2015.

Victor Muguto, Long Term insurance Leader at PwC says: “The outlook for the insurance industry is, however, starting to suffer from the negative economic impact of rising interest rates, energy and fuel costs, inflation and subdued equity markets. Furthermore, insurers also continue to carry the costs of an increasing regulatory burden and adapting to advances in technology and changing policyholder behaviour.

“Most insurers have begun change on their capital structures to comply with the proposed Solvency Assessment and Management (SAM) prudential regulations which will be implemented in January 2017.Insurers are also making significant changes to comply with the proposed Treating Customers Fairy (TCF) market conduct regulations. Other changes in the pipeline include proposals that will follow from the Retail Distribution Review (RDW) currently underway and changes to the taxation of life insurance new business. ”

These are some of the highlights of the fifth edition of PwC’s Insurance Industry Analysis, 2016. The survey analyses the results of South Africa’s major insurers for the year ended 31 December 2015. The survey identifies common trends, issues and challenges that are shaping the industry.

Overview of the long-term insurance sector

The financial results of the top five players (Discovery, Liberty, MMI, Old Mutual and Sanlam) were included in the survey.

The combined group embedded value earnings were 16% lower than 2014 (2015:R33bn; 2014: R39.4bn). “The impact of economic assumption changes reduced EV earnings by R7 billion and was the main reason for the decline in covered EV earnings,” explains van den Berg.

Despite a challenging environment, the combined values of new business premiums (PVNBP) reflect fair results. The 6% year-on-year increase is in line with CPI for the period. However, the competitive environment took its toll on the embedded value profit margins achieved on new business written. The value of new business (VNB) margin of 2.7% reduced by 6% compared to 2014 following the previous 7% decline in 2014. The VNB margin decrease is partly due to changes in product mix and pressure on risk premium pricing.

Insurers struggled to manage actual expenses within the range of the projected actuarial assumptions set at the end of 2014. As in the prior year, all insurers profited from better-than-expected mortality and morbidity experience, which contributed approximately 5.3% to 2015 embedded value earnings.

Acquisition costs incurred by the businesses of the long-terms insurers increased by 8% to R18.1 billion in 2015. The growth in the annual premium equivalent of the industry was less than last year as a result of the economic climate.

Overview of the short-term insurance sector

The results of the following three short-term insurance companies were considered in the survey: Mutual & Federal, OUTsurance and Santam.

Chantel van den Heever, Short-Term Insurance Leader for PwC Africa, says: “Short-term insurers showed significant improvement in 2015 in their IFRS earnings and key ratios. Insurers are actively managing to reduce their claims handling costs as well as to improve the quality of their policyholder books.

“There were no major catastrophe events during the year except for the severe drought which affected the majority of South Africa’s farmers. This line of business’ gross underwritten premiums decreased significantly due to the risks not attaching as farmers did not plant their crops.”

An estimated 65% of the country’s vehicles and household items are not insured. Consumers are not expected to purchase new assets due to economic difficulties. Consequently this will affect the growth in gross written premiums going forward. “It is of the utmost importance that insurers continue to place emphasis on their pricing models to ensure they remain competitive and not lose policyholders who are considered to be good business due to the premiums becoming unaffordable,” adds van den Heever.

The past year was a successful year for the insurance industry building on the good results from the prior year. The majority of insurers improved their claims ratios largely due to the lack of severe catastrophes during the year. The combined claims ratio for the industry decreased from 61.5% in 2014 to 58.7% in 2015. In addition, the market’s underwriting margins improved from 9.2% in 2014 to 10.8% in 2015.

The combined IFRS earnings for the year of R4.1 billion (excluding M&F) increased by 32% on 2014. This was largely due to the improved underwriting margin experienced in the market.

Combined gross written premiums increased by 12% to R52.2 billion in 2015. This increase was again in excess of CPI of 4.5%. This is mainly due to insurers continuing to effect rate increases on consumers in order to mitigate rising insurance costs as well as to ensure that the quality of the policyholder books are maintained.

Growth across the rest of the continent

South African insurers continue to diversify to other parts of the continent and to invest for future growth as our local economy slows down. We continue to see more acquisitions and strategic partnerships with other insurers on the continent.

Looking ahead

Given the challenging economic environment, insurers are ‘breaking away from business as usual’ and looking for new ways to achieve growth. Insurance CEOs surveyed in PwC’s 19th Global CEO survey confirmed a number of medium to long term trends which will disrupt the insurance industry by 2020, more so than most other industries. They include developments such as FinTech, changing demographics, and the increasing economic significance of emerging markets. These changes, along with changing regulations will significantly change the structure of the insurance industry.

Some South African insurers are already investing in new technologies that enable them to adapt to the changing environment. “Digital technology and data analytical ability will be significant components of not only facilitating more real-time engagement with consumers, but also anticipating their changing needs and managing insurance risks more proactively rather than reactively,” concludes Muguto.